Page 28

 

Notes to the consolidated financial statements

 

 

 

 

A1 - Basis of preparation

(a)  The results for the year ended 31 December 2012 have been prepared using International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU), and those parts of the Companies Act 2006, applicable to those reporting under IFRS. The results in this preliminary announcement have been prepared in accordance with IFRS applicable at 31 December 2012 and have been taken from the Group's Annual Report and Accounts, which will be available on the Company's website on 25 March 2013.

               The Group has adopted the following new amendments to standards which became effective for financial years beginning on or after 1 January 2012. Neither of these amendments has a material impact on these financial statements.

                              (i)  Amendment to IFRS 7, Financial Instruments - Disclosures, relating to the transfer of financial assets.

                              (ii) Amendment to IAS 12, Income Taxes, relating to deferred tax.

               The preliminary announcement for the year ended 31 December 2012 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results on an IFRS basis for  full year 2012 have been audited by PricewaterhouseCoopers LLP (PwC)  and the results for full year 2011 were audited by Ernst & Young LLP (E&Y). PwC ad E&Y respectively have reported on the 2012 and 2011 financial statements.  Both reports were unqualified and neither contained a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2011 Report and Accounts has been filed with the Registrar of Companies.

               After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

(b)  Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company's functional and presentational currency. Unless otherwise noted, the amounts shown in the financial statements are in millions of pounds sterling (£m).

 

(c)  As described in note A3c(i), the Group's US life and annuity business and associated investment management operations (together 'US Life'), have been classified as held for sale. As the Group will exit from a major geographical area of operations, previously presented as 'United States' in the segmental reporting note, the results of US Life for the year, as well as those for preceding years, have been classified as discontinued operations.

               The results presented as discontinued operations for 2011 and preceding years also include the results of Delta Lloyd N.V.
as a subsidiary, which was deconsolidated during 2011.

 

(d)  Following the announcement in April 2012 relating to the restructuring of the Group, the Group's operating segments were changed to align them with the revised organisational reporting structure. The Group has determined its operating segments along market reporting lines, reflecting the management structure whereby a member of the Executive Management team is accountable to the group chief executive for the operating segment for which he is responsible. Further details of the reportable segments are given in note A4.

 

(e)  Following a review of the classification of contracts issued by the Group's Italian long-term business certain portfolios have been reclassified from participating insurance contracts to participating investment contracts. As a result, there has been a reallocation from gross insurance liabilities at 31 December 2011 to gross liabilities for investment contracts of £2,722 million. The change in insurance liabilities net of reinsurance recognised in the income statement for the year to 31 December 2011 has decreased by £168 million, and the change in investment contract provisions has increased by an equal amount. There is no impact on profit for the year or equity reported for the year ended 31 December 2011.

 

(f)  The long-term nature of much of the Group's operations means that, for management's decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Operating profit also excludes impairment of goodwill, associates and joint ventures, amortisation and impairment of other intangibles; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items.

 

 

Page 29

 

 

A2 - Exchange rates

The Group's principal overseas operations during the year were located within the Eurozone and the United States. The results and cash flows of these operations have been translated into sterling at the average rates for the year and the assets and liabilities have been translated at the year end rates as follows:

 

	2012	2011
Eurozone
- Average rate (€1 equals)	£0.81	£0.87
- Period end rate (€1 equals)	£0.81	£0.84
United States
- Average rate ($US1 equals)	£0.63	£0.63
- Period end rate ($US1 equals)	£0.62	£0.65

 

Total foreign currency translations from continuing operations amounted to a gain of £128 million (2011: £35 million loss) in the income statement. These result from the settlement of transactions and translations of assets and liabilities denominated in foreign currencies.

A3 - Subsidiaries

This note provides details of the acquisitions and disposals of subsidiaries that the Group has made during the year, together with details of businesses held for sale at the year end. .

(a) Acquisitions

There have been no material acquisitions during 2012.

(b) Disposal and remeasurement of subsidiaries, joint ventures and associates

The (loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises:

 

	2012 £m	2011 £m
Continuing operations
United Kingdom - RAC Limited (see (i) below)	(21)	532
Delta Lloyd associate (see (iii) below)	(129)	-
Australia	-	23
Sri Lanka (see (iv) below)	12	-
Czech Republic, Hungary and Romania (see (ii) below)	7	-
Other small operations	(33)	10
(Loss)/profit on disposal and remeasurement from continuing operations	(164)	565
Loss on disposal and remeasurement from discontinued operations (see note A3c(i) below)	(2,359)	(32)
Total (loss)/profit on disposal and remeasurement	(2,523)	533

 

No tax arises on the profits and losses on these disposals.

 

 

Page 30

 

A3 - Subsidiaries continued

(i) RAC Limited

The loss in respect of RAC Limited in 2012 arises from residual costs related to the sale of that company in September 2011.

(ii) Czech Republic, Hungary and Romania life business

On 31 July 2012, the Group sold its operations in the Czech Republic and Hungary and its Romania life assurance business to MetLife, Inc, for £37 million. Net assets disposed of were £32 million, comprising gross assets of £379 million and liabilities of £347 million, giving a profit on disposal of £3 million after transaction costs. Recycling currency translation reserves of £4 million to the income statement resulted in an overall profit on disposal of £7 million. The sale of our Romania pensions business is still subject to regulatory approval and is expected to complete in the next 12 months, so it has been classified as held for sale (see note A3c(v)).

(iii) Delta Lloyd associate

On 5 July 2012, the Group sold 37.2 million shares in Delta Lloyd for £313 million (net of transaction costs), reducing our holding at that date to 19.8% of Delta Lloyd's ordinary share capital, representing 18.6% of shareholder voting rights. As the Group no longer had significant influence over Delta Lloyd, the Group ceased to account for that company as an associate from 5 July 2012. From that date, our holding was classified as a financial investment, held at fair value through profit and loss.

      The loss on disposal is calculated as follows:

 

	2012 £m
Cash consideration, net of transaction costs	313
Fair value of financial investment holding at 5 July 2012	315
Net Consideration	628
Interest in associate	(595)
Currency translation and investment valuation reserves recycled to income statement	(162)
Loss on disposal	(129)

 

On 8 January 2013 the Group announced the sale of its remaining shareholding in Delta Lloyd, resulting in gross cash proceeds of £353 million.

(iv) Sri Lanka

On 4 December 2012, the Group sold its controlling 58.4% interest in Aviva NDB Holdings Lanka (Private) Limited ("Aviva NDB"),
to AIA Group Limited for consideration of £31 million. Net assets of the business were £16 million (comprising gross assets of £205 million and liabilities of £189 million). After recycling of currency translation reserves of £3 million the profit on disposal amounted to £12 million.

(c) Assets and liabilities of operations classified as held for sale

The assets and liabilities of operations classified as held for sale as at 31 December 2012 are as follows:

 

			2012	2011
	US Life1 £m	Other £m	Total £m	Total £m
Assets
Goodwill	-	183	183	-
Acquired value of in-force and intangible assets	408	83	491	1
Interests in, and loans to, joint ventures and associates	-	126	126	12
Property and equipment	-	2	2	1
Investment Property	6	12	18	-
Loans	3,397	-	3,397	-
Financial investments	31,212	5,203	36,415	347
Reinsurance assets	644	239	883	1
Deferred acquisition costs	1,468	70	1,538	23
Other assets	769	97	866	15
Cash and cash equivalents	544	373	917	26
	38,448	6,388	44,836	426
Additional impairment to write down the disposal group to fair value less costs to sell	(2,233)	-	(2,233)	-
Total assets	36,215	6,388	42,603	426
Liabilities
Gross insurance liabilities	(31,153)	(3,294)	(34,447)	(344)
Gross liabilities for investment contracts	(2,197)	(1,857)	(4,054)	-
Unallocated divisible surplus	-	(55)	(55)	-
Provisions	(184)	(3)	(187)	(4)
Deferred tax liabilities	(672)	(8)	(680)	-
Borrowings	(145)	-	(145)	-
Other liabilities	(1,497)	(346)	(1,843)	(15)
Total liabilities	(35,848)	(5,563)	(41,411)	(363)
Net assets	367	825	1,192	63

1 US Life comprises US long term business previously reported under the heading "United States" and associated internal asset management operations previously reported under "Aviva Investors" in note A4 - segmental information.

 

 

 

Page 31

 

 

A3 - Subsidiaries continued

The businesses classified as held for sale comprise:

(i) US long term business

On 8 November 2012 the Group confirmed it was in discussions with external parties with respect to its US life operations, consisting of Aviva Life and Annuity Company and the associated internal asset management operations of Aviva Investors North America, Inc ("US Life") and these have been classified as held for sale. On 21 December 2012 the Group announced that it had agreed to sell US Life to Athene Holding Ltd for consideration of £1.0 billion including the shareholder loan (£1.1 billion including repayment of an external loan). There is uncertainty in the ultimate consideration, which depends on the development of statutory surplus between the announcement of sale and ultimate completion date. The transaction is expected to complete in 2013.

      Following classification as held for sale, US Life has been re-measured to fair value less costs to sell resulting in an impairment loss of £2,359 million, recognised within "Loss on the disposal and re-measurement of subsidiaries and associates" in the income statement, as a component of the result of discontinued operations.

      An impairment of £126 million has reduced the carrying value of property and equipment, investments in associates and prepayments within US Life to nil. The remaining impairment of £2,233 million reduces the value of the US Life disposal group so that the carrying value of this business is equal to its fair value less costs to sell of £367 million.

      As described in Note A1(c), the results of US Life for the year, as well as those for preceding years, have been classified as discontinued operations in the income statement.

      Other comprehensive income, net of tax from discontinued operations of £68 million includes £528 million fair value gains on available for sale financial investments, £(235) million fair value gains on available for sale financial investments transferred to the income statement on disposal, £(130) million foreign exchange losses, £12 million of impairment losses transferred to the income statement, and £(107) million aggregate shareholder tax effect.

      On completion of the disposal the currency translation reserves and investment valuation reserves relating to the US Life operations, currently recognised within equity, will be recycled to the income statement.

(ii) Irish long-term business - Ark Life

Irish long-term business is carried out through a subsidiary, Aviva Life Holdings Ireland Limited ("ALHI"), which is 75% owned by Aviva and 25% owned by Allied Irish Bank ("AIB"). ALHI holds four subsidiaries, one of which is Ark Life Assurance Company Limited ("Ark Life") which carries out bancassurance business via a distribution agreement with AIB. The original distribution agreement was renewable in 2011 but, on 15 December 2011, AIB notified the Group that they did not wish to renew it and the existing shareholders' agreement governing ALHI was terminated. The termination of this agreement triggered the ability for both parties to exercise put and call options that will result in the unwind of the original structure such that the Ark Life business returns 100% to AIB and the Group will purchase the 25% minority stake in ALHI. The formal exercise of these options was approved on 17 January 2012 and, as a result, the Ark Life business became held for sale on that date. Completion of the transaction is subject to agreement of terms with AIB and regulatory approval. Completion is expected in the next 12 months.

      Management's current best estimate of the disposal proceeds for the Ark Life business is £232 million net of transaction costs, which is lower than its carrying value following impairments charged in 2011. A further charge to profit of £111 million has been recognised during 2012 reflecting revised expected disposal proceeds.

      The exercise of the put options in January 2012 over AIB's non-controlling interest in ALHI led to our reclassifying this non-controlling interest from equity to financial liabilities as at 31 December 2011. Our current estimate of the liability as at 31 December 2012 is £122 million. A credit to the income statement of £76 million has been recognised in 2012 reflecting the revised expected purchase liability.

      The net impact of these two movements is a charge to profit of £35 million, before exchange movements, recognised within net investment income. Finalisation of the exit value for Ark Life and the purchase value for the minority share in ALHI is subject to the conclusion of discussions with AIB.

(iii) Spanish long-term business - Aseval

On 18 December 2012 Aviva reached a settlement with Bankia S.A. ("Bankia") to transfer the Group's entire holding in Aseval Aseguradora Valenciana, Sociedad Anónima de Seguros y Reaseguros ("Aseval"), a Spanish life assurance company, to Bankia. Aseval was classified as held for sale at this date. The transfer is expected to complete on or before 30 April 2013 with proceeds of £494 million. Aseval is included within the 'Italy, Spain and Other' operating segment at its carrying value.

(iv) Russian long-term business

During the year the Group entered into negotiations to dispose of Aviva Russia. On 27 February 2013 the Group announced the sale of the business to Blagosostoyanie for consideration of €35 million. The transaction is expected to complete in the first half of 2013. The business is included in the statement of financial position at its carrying value.  

(v) Other

Other businesses classified as held for sale comprise joint ventures in Taiwan and Malaysia and the Group's pensions business subsidiary in Romania.

 

 

 

Page 32

 

A4 - Segmental information

The Group's results can be segmented, either by activity or by geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position.

(a) Operating segments

Following the announcement in April 2012 relating to the restructuring of the Group, the Group's operating segments were changed to align them with the new management structure. The revised segments are set out below. Results for prior years have been restated to facilitate comparison with this new structure.

United Kingdom & Ireland

The United Kingdom and Ireland comprises two operating segments - Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business and Health in the UK, whilst UK and Ireland General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers' liability and professional indemnity liability) and medical expenses. UK and Ireland General Insurance business also includes the results of Ireland Health. For the period to its disposal on 30 September 2011, UK and Ireland General Insurance also included the RAC motor recovery business.

France

The principal activities of our French operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer.

Canada

The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products through a range of distribution partners.

Italy, Spain and Other

These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS8. This segment includes our operations in Italy and Spain (including Aseval which is held for sale as at 31 December 2012). The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. This segment also includes the results of our Czech, Hungarian and Romanian life businesses up until the date of their sale in July 2012 as well as our Reinsurance and Run Off businesses.

Higher growth markets

Activities reported in the higher growth markets operating segment include our businesses in Asia, Poland, Turkey and Russia. Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, South Korea, Vietnam and Indonesia as well as our life operations in Taiwan and Malaysia which are held for sale as at the balance sheet date and the results of Sri Lanka up until the date of disposal in December 2012. Higher growth also includes general insurance operations in Singapore, Indonesia, Poland and Turkey and long-term business in Poland, Turkey and Russia (which is held for sale at the year-end).

Aviva Investors

Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France and Canada and other international businesses, managing policyholders' and shareholders' invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. The internal asset management operations of Aviva Investors North America are being sold with the Group's US life operations, and are classified as held for sale and as a discontinued operation in these financial statements.

Other Group activities

Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in 'Other Group activities', along with central core structural borrowings and certain tax balances in the segmental statement of financial position. Also included here are consolidation and elimination adjustments and the Group's interest in Delta Lloyd, as an associate to 5 July 2012, and as a financial investment after that date.

Discontinued operations

In December 2012 the Group announced it had agreed to sell its US life operations (including the related internal asset management operations of Aviva Investors) and therefore it has been classified as a discontinued operation for presentation in the income statement and held for sale in the statement of financial position.

      On 6 May 2011 the Group ceased to hold a majority of the shareholder voting rights in Delta Lloyd and therefore the results of Delta Lloyd up to 6 May 2011 are presented as discontinued operations for 2011 and prior years. After this date, the Group ceased to consolidate Delta Lloyd.

Measurement basis

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of:

(i)   profit or loss from operations before tax attributable to shareholders

(ii)  profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment management's control, including investment market performance and fiscal policy changes

 

 

Page 33

 

 

 

A4 - Segmental information continued

a (i) Segmental income statement for the year ended 31 December 2012

 

	Developed Markets
	United Kingdom & Ireland
	Life £m	GI £m	France £m	Canada £m	Italy, Spain and Other £m	Higher growth markets £m	Aviva Investors3 £m	Other Group activities4 £m	Continuing operations £m	Discontinued Operations2 £m	Total £m
Gross written premiums	6,363	4,951	4,763	2,248	3,033	1,386	-	-	22,744	3,796	26,540
Premiums ceded to reinsurers	(740)	(450)	(55)	(63)	(127)	(136)	-	-	(1,571)	(207)	(1,778)
Internal reinsurance revenue	-	(11)	(6)	(9)	36	(10)	-	-	-	-	-
Net written premiums	5,623	4,490	4,702	2,176	2,942	1,240	-	-	21,173	3,589	24,762
Net change in provision for unearned premiums	(15)	63	(28)	(31)	3	(8)	-	-	(16)	-	(16)
Net earned premiums	5,608	4,553	4,674	2,145	2,945	1,232	-	-	21,157	3,589	24,746
Fee and commission income	448	188	121	42	125	70	279	-	1,273	23	1,296
	6,056	4,741	4,795	2,187	3,070	1,302	279	-	22,430	3,612	26,042
Net investment income/(expense)	8,639	523	8,042	140	3,140	697	(8)	(67)	21,106	2,241	23,347
Inter-segment revenue	-	-	-	-	-	-	134	-	134	75	209
Share of (loss)/profit of joint ventures and associates	(37)	-	8	-	-	1	7	(256)	(277)	-	(277)
(Loss)/profit on the disposal and remeasurement of subsidiaries and associates	(2)	(21)	-	-	7	12	-	(160)	(164)	(2,359)	(2,523)
Segmental income	14,656	5,243	12,845	2,327	6,217	2,012	412	(483)	43,229	3,569	46,798
Claims and benefits paid, net of recoveries from reinsurers	(9,224)	(2,908)	(5,272)	(1,268)	(3,916)	(1,013)	-	-	(23,601)	(2,721)	(26,322)
Change in insurance liabilities, net of reinsurance	404	(22)	(880)	(40)	400	(292)	-	-	(430)	(1,566)	(1,996)
Change in investment contract provisions	(3,151)	-	(983)	-	(295)	18	(39)	-	(4,450)	(77)	(4,527)
Change in unallocated divisible surplus	(347)	-	(4,359)	-	(1,491)	(119)	-	-	(6,316)	-	(6,316)
Amortisation of acquired value of in-force business	(13)	-	(18)	-	(9)	(3)	-	-	(43)	(183)	(226)
Impairment of goodwill and other intangibles, depreciation and other amortisation expense	(107)	(59)	(3)	(17)	(129)	(7)	(9)	(5)	(336)	(916)	(1,252)
Other operating expenses	(1,505)	(1,944)	(845)	(745)	(432)	(352)	(357)	(678)	(6,858)	(691)	(7,549)
Impairment losses on AVIF and tangible assets1	(34)	(43)	(1)	-	(3)	1	-	-	(80)	(15)	(95)
Inter-segment expenses	(122)	(3)	-	(4)	-	(5)	-	-	(134)	(75)	(209)
Finance costs	(261)	(58)	(2)	(9)	(2)	-	(5)	(398)	(735)	(21)	(756)
Segmental expenses	(14,360)	(5,037)	(12,363)	(2,083)	(5,877)	(1,772)	(410)	(1,081)	(42,983)	(6,265)	(49,248)
Profit/(loss) before tax	296	206	482	244	340	240	2	(1,564)	246	(2,696)	(2,450)
Tax attributable to policyholders' returns	(198)	-	-	-	-	(23)	-	-	(221)	-	(221)
Profit/(loss) before tax attributable to shareholders	98	206	482	244	340	217	2	(1,564)	25	(2,696)	(2,671)
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	7	(1)	25	-	3	-	1	(35)	-	-	-
Investment return variances and economic assumption changes on long-term business	663	-	(28)	-	-	(15)	-	-	620	(342)	278
Short-term fluctuation in return on investments backing non-long- term business	-	(36)	(68)	10	(56)	(1)	-	144	(7)	-	(7)
Economic assumption changes on general insurance and health business	-	20	-	-	1	-	-	-	21	-	21
Impairment of goodwill, associates and joint ventures	(1)	-	-	-	108	-	-	(47)	60	782	842
Amortisation and impairment of intangibles	54	40	-	11	13	4	6	-	128	129	257
(Profit)/loss on the disposal of subsidiaries and associates	2	21	-	-	(7)	(12)	-	160	164	2,359	2,523
Integration and restructuring costs	87	154	11	11	12	9	33	144	461	7	468
Exceptional items	-	-	-	-	-	-	-	-	-	-	-
Share of Delta Lloyd's non-operating items (before tax), as an associate	-	-	-	-	-	-	-	523	523	-	523
Share of Delta Lloyd's tax expense, as an associate	-	-	-	-	-	-	-	(107)	(107)	-	(107)
Operating profit/(loss) before tax attributable to shareholders	910	404	422	276	414	202	42	(782)	1,888	239	2,127

1  Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £nil million and £nil million respectively.

2  Discontinued operations represent the operations of the United States Life business and related internal asset management activities.

3  Aviva Investors operating profit includes £3 million profit relating to the Aviva Investors Pooled Pension business.

4  Other group activities include Delta Lloyd as an associate up until 5 July 2012 and as a financial investment thereafter.

 

 

Page 34

 

A4 - Segmental information continued

a (ii) Segmental income statement for the year ended 31 December 2011

 

	Developed Markets
	United Kingdom & Ireland
	Life £m	GI £m	France £m	Canada £m	Restated4 Italy, Spain and Other £m	Higher growth markets £m	Aviva Investors3 £m	Other Group activities5 £m	Restated4 Continuing operations £m	Discontinued Operations2 £m	Total £m
Gross written premiums	7,639	5,227	5,305	2,164	4,586	1,334	-	-	26,255	5,863	32,118
Premiums ceded to reinsurers	(816)	(375)	(66)	(70)	(108)	(115)	-	-	(1,550)	(198)	(1,748)
Internal reinsurance revenue	-	(11)	(6)	(11)	34	(4)	-	-	2	(2)	-
Net written premiums	6,823	4,841	5,233	2,083	4,512	1,215	-	-	24,707	5,663	30,370
Net change in provision for unearned premiums	(39)	(78)	(22)	(46)	(25)	(26)	-	-	(236)	(56)	(292)
Net earned premiums	6,784	4,763	5,211	2,037	4,487	1,189	-	-	24,471	5,607	30,078
Fee and commission income	462	240	147	38	174	80	324	-	1,465	111	1,576
	7,246	5,003	5,358	2,075	4,661	1,269	324	-	25,936	5,718	31,654
Net investment income/(expense)	5,495	451	(896)	236	(747)	(158)	79	(119)	4,341	2,086	6,427
Inter-segment revenue	-	-	-	-	-	-	148	-	148	71	219
Share of (loss)/profit of joint ventures and associates	(41)	-	9	-	(12)	1	4	(84)	(123)	28	(95)
Profit/(loss) on the disposal and remeasurement of subsidiaries and associates	-	528	37	-	-	-	23	(23)	565	(32)	533
Segmental income	12,700	5,982	4,508	2,311	3,902	1,112	578	(226)	30,867	7,871	38,738
Claims and benefits paid, net of recoveries from reinsurers	(9,589)	(3,217)	(5,366)	(1,308)	(4,118)	(782)	-	-	(24,380)	(4,029)	(28,409)
Change in insurance liabilities, net of reinsurance	(2,373)	89	62	(1)	(283)	222	-	-	(2,284)	(2,523)	(4,807)
Change in investment contract provisions	949	-	583	-	37	46	(137)	-	1,478	(180)	1,298
Change in unallocated divisible surplus	358	-	1,334	-	1,053	(24)	-	-	2,721	(19)	2,702
Amortisation of acquired value of in-force business	(35)	-	(19)	-	(11)	(5)	-	-	(70)	(200)	(270)
Impairment of goodwill and other intangibles, depreciation and other amortisation expense	(260)	(36)	(7)	(18)	(28)	(8)	(17)	(2)	(376)	(64)	(440)
Other operating expenses	(1,375)	(1,894)	(806)	(673)	(567)	(369)	(384)	(495)	(6,563)	(932)	(7,495)
Impairment losses on AVIF and tangible assets1	-	(60)	(4)	-	(31)	-	(1)	-	(96)	(33)	(129)
Inter-segment expenses	(133)	(6)	-	(3)	-	(6)	-	-	(148)	(71)	(219)
Finance costs	(277)	(52)	(18)	(11)	(2)	-	(3)	(413)	(776)	(284)	(1,060)
Segmental expenses	(12,735)	(5,176)	(4,241)	(2,014)	(3,950)	(926)	(542)	(910)	(30,494)	(8,335)	(38,829)
(Loss)/profit before tax	(35)	806	267	297	(48)	186	36	(1,136)	373	(464)	(91)
Tax attributable to policyholders' returns	186	-	-	-	-	(8)	-	-	178	-	178
Profit/(loss) before tax attributable to shareholders	151	806	267	297	(48)	178	36	(1,136)	551	(464)	87
Adjusted for non-operating items:
Reclassification of corporate costs and unallocated interest	-	2	20	-	2	-	1	(25)	-	-	-
Investment return variances and economic assumption changes	543	-	47	-	285	22	-	-	897	719	1,616
Short term fluctuation in return on investments backing non-long-term business	-	54	140	(64)	62	-	-	74	266	60	326
Economic assumption changes on general insurance and health business	-	86	-	4	-	-	-	-	90	-	90
Impairment of goodwill, associates and joint ventures	149	-	-	-	11	15	-	217	392	-	392
Amortisation and impairment of intangibles	66	9	4	11	12	5	9	-	116	60	176
(Profit)/loss on the disposal of subsidiaries and associates	-	(528)	(37)	-	-	-	(23)	23	(565)	32	(533)
Integration and restructuring costs	46	37	30	6	10	9	30	93	261	7	268
Exceptional items	22	35	-	-	-	-	-	-	57	-	57
Share of Delta Lloyd's non-operating items (before tax), as an associate	-	-	-	-	-	-	-	(10)	(10)	-	(10)
Share of Delta Lloyd's tax expense, as an associate	-	-	-	-	-	-	-	34	34	-	34
Operating profit/(loss) before tax attributable to shareholders	977	501	471	254	334	229	53	(730)	2,089	414	2,503

1  Impairment losses, and reversal of such losses, recognised directly in other comprehensive income were £2 million and £nil respectively.

2  Discontinued operations represent the operations of the United States Life assurance and related asset management activities, and the results of Delta Lloyd up until its deconsolidation in May 2011.

3  Aviva Investors operating profit includes £3 million profit relating to the Aviva Investors Pooled Pension business.

4  Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.

5  Other group activities include Delta Lloyd as an associate.

 

 

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A4 - Segmental information continued

a (iii) Segmental statement of financial position as at 31 December 2012

 

	Developed Markets
	United Kingdom & Ireland
	Life £m	GI £m	France £m	United States £m	Canada £m	Italy, Spain and Other £m	Higher growth markets £m	Aviva Investors £m	Other Group activities £m	Total £m
Goodwill	-	1,037	-	-	50	342	64	27	-	1,520
Acquired value of in-force business and intangible assets	140	58	133	-	49	633	15	56	-	1,084
Interests in, and loans to, joint ventures and associates	1,185	-	148	-	-	-	371	4	-	1,708
Property and equipment	91	34	220	-	21	5	11	5	4	391
Investment property	7,650	8	1,342	-	-	2	-	1,093	720	10,815
Loans	23,193	299	848	-	83	14	30	-	70	24,537
Financial investments	90,064	3,127	60,001	-	3,766	21,900	5,761	759	3,700	189,078
Deferred acquisition costs	1,422	519	211	-	275	106	35	-	-	2,568
Other assets	16,883	4,122	11,304	-	1,053	2,828	699	436	4,060	41,385
Assets of operations classified as held for sale	3,490	-	-	36,187	-	2,631	267	28	-	42,603
Total assets	144,118	9,204	74,207	36,187	5,297	28,461	7,253	2,408	8,554	315,689
Insurance liabilities
Long term business and outstanding claims provisions	71,282	5,789	14,194	-	2,494	9,730	4,913	-	-	108,402
Unearned premiums	238	2,274	369	-	1,127	280	153	-	-	4,441
Other insurance liabilities	-	86	61	-	98	2	1	-	-	248
Liability for investment contracts	49,719	-	46,952	-	-	11,893	47	1,883	-	110,494
Unallocated divisible surplus	2,055	-	4,591	-	-	38	247	-	-	6,931
Net asset value attributable to unitholders	1,375	-	3,383	-	-	205	-	-	6,183	11,146
External borrowings	2,949	3	-	-	-	101	-	-	5,141	8,194
Other liabilities, including inter-segment liabilities	7,114	(2,545)	2,562	-	467	931	346	255	3,932	13,062
Liabilities of operations classified as held for sale	3,257	-	-	35,835	-	2,188	118	13	-	41,411
Total liabilities	137,989	5,607	72,112	35,835	4,186	25,368	5,825	2,151	15,256	304,329
Total equity										11,360
Total equity and liabilities										315,689
Capital expenditure (excluding business combinations)	63	42	176	29	21	15	7	24	-	377

 

External borrowings by holding companies within the Group which are not allocated to operating companies are included in 'Other Group activities'.

 

 

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A4 - Segmental information continued

a (iv) Segmental statement of financial position as at 31 December 2011

 

	Developed Markets
	United Kingdom & Ireland
	Life £m	GI £m	France £m	United States £m	Canada £m	Restated2 Italy, Spain and Other £m	Higher growth markets £m	Aviva Investors £m	Other Group activities1 £m	Restated2 Total £m
Goodwill	-	1,040	-	800	50	650	71	29	-	2,640
Acquired value of in-force business and intangible assets	326	67	155	681	47	678	23	44	-	2,021
Interests in, and loans to, joint ventures and associates	1,274	-	152	1	-	-	600	15	776	2,818
Property and equipment	228	45	50	113	19	18	13	16	8	510
Investment property	8,431	20	1,246	6	-	2	-	1,133	800	11,638
Loans	23,440	524	949	3,067	80	16	40	-	-	28,116
Financial investments	90,165	3,268	55,074	30,613	3,683	23,895	5,398	884	3,078	216,058
Deferred acquisition costs	1,594	566	207	1,950	274	129	35	-	-	4,755
Other assets	16,864	3,828	11,856	1,752	1,183	2,366	507	579	4,459	43,394
Assets of operations classified as held for sale	-	-	-	-	-	414	12	-	-	426
Total assets	142,322	9,358	69,689	38,983	5,336	28,168	6,699	2,700	9,121	312,376
Insurance liabilities
Long term business and outstanding claims provisions	72,513	6,048	13,679	30,697	2,538	12,408	4,732	-	-	142,615
Unearned premiums	350	2,209	353	-	1,122	296	153	-	-	4,483
Other insurance liabilities	-	95	85	-	100	1	-	-	-	281
Liability for investment contracts	48,456	-	47,346	2,833	-	12,543	51	2,137	-	113,366
Unallocated divisible surplus	1,712	-	249	-	-	(1,435)	124	-	-	650
Net asset value attributable to unitholders	1,279	-	3,362	-	-	18	-	-	5,693	10,352
External borrowings	2,945	2	-	159	-	89	-	-	5,255	8,450
Other liabilities, including inter-segment liabilities	8,829	(3,280)	2,538	2,188	456	1,059	232	309	4,122	16,453
Liabilities of operations classified as held for sale	-	-	-	-	-	363	-	-	-	363
Total liabilities	136,084	5,074	67,612	35,877	4,216	25,342	5,292	2,446	15,070	297,013
Total equity										15,363
Total equity and liabilities										312,376
Capital expenditure (excluding business combinations)	55	79	5	21	8	17	9	20	-	214

1  Other group activities include Delta Lloyd as an associate.

2. Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.

(b) Further analysis by products and services

The Group's results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.

Long-term business

Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business and our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.

General insurance and health

Our general insurance and health business provides insurance cover to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers' liability and professional indemnity liability, and medical expenses.

Fund management

Our fund management business invests policyholders' and shareholders' funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products, including investment funds, unit trusts,
OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.

Other

Other includes the RAC non-insurance operations (up to the disposal date of 30 September 2011), service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.

Discontinued operations and Delta Lloyd

In the products and services analysis, the results of US Life (including the related internal asset management business) for all periods presented and Delta Lloyd up to 6 May 2011 are presented as discontinued operations. Between 6 May 2011 and 5 July 2012, the Group's share of the results of its interest in Delta Lloyd as an associate and, from 5 July 2012 to the year-end, as a financial investment, are shown only within other activities within continuing operations.

 

 

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A4 - Segmental information continued

b (i) Segmental income statement - products and services for the year ended 31 December 2012

 

	Long-term business £m	General insurance and health2 £m	Fund management £m	Other3 £m	Total £m
Gross written premiums1	13,209	9,535	-	-	22,744
Premiums ceded to reinsurers	(930)	(641)	-	-	(1,571)
Net written premiums	12,279	8,894	-	-	21,173
Net change in provision for unearned premiums	-	(16)	-	-	(16)
Net earned premiums	12,279	8,878	-	-	21,157
Fee and commission income	632	65	331	245	1,273
	12,911	8,943	331	245	22,430
Net investment income/(expense)	20,295	823	6	(18)	21,106
Inter-segment revenue	-	-	127	-	127
Share of (loss)/profit of joint ventures and associates	(27)	1	3	(254)	(277)
(Loss)/profit on the disposal and remeasurement of subsidiaries and associates	(6)	(21)	-	(137)	(164)
Segmental income	33,173	9,746	467	(164)	43,222
Claims and benefits paid, net of recoveries from reinsurers	(17,839)	(5,762)	-	-	(23,601)
Change in insurance liabilities, net of reinsurance	(359)	(71)	-	-	(430)
Change in investment contract provisions	(4,450)	-	-	-	(4,450)
Change in unallocated divisible surplus	(6,316)	-	-	-	(6,316)
Amortisation of acquired value of in-force business	(43)	-	-	-	(43)
Impairment of goodwill and other intangibles, depreciation and other    amortisation expense	(236)	(25)	(10)	(65)	(336)
Other operating expenses	(2,477)	(3,170)	(390)	(821)	(6,858)
Impairment losses on AVIF and tangible assets	(37)	(43)	-	-	(80)
Inter-segment expenses	(116)	(11)	-	-	(127)
Finance costs	(215)	(29)	(56)	(435)	(735)
Segmental expenses	(32,088)	(9,111)	(456)	(1,321)	(42,976)
Profit/(loss) before tax from continuing operations	1,085	635	11	(1,485)	246
Tax attributable to policyholder returns	(221)	-	-	-	(221)
Profit/(loss) before tax attributable to shareholders	864	635	11	(1,485)	25
Adjusted for:
Non-operating items from continuing operations (excluding Delta Lloyd as an associate)	967	258	40	182	1,447
Share of Delta Lloyd's non-operating items (before tax), as an associate	-	-	-	523	523
Share of Delta Lloyd's tax expense, as an associate	-	-	-	(107)	(107)
Operating profit/(loss) before tax attributable to shareholders' profits    from continuing operations	1,831	893	51	(887)	1,888
Operating profit/(loss) before tax attributable to shareholders' profits    from discontinued operations4	200	-	55	(16)	239
Operating profit/(loss) before tax attributable to shareholders' profits	2,031	893	106	(903)	2,127

1  Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £370 million, of which £130 million relates to property and liability insurance and £240 million relates to long-term business.

2  General insurance and health business segment includes gross written premiums of £1,164 million relating to health business. The remaining business relates to property and liability insurance.

3  Other includes Delta Lloyd as an associate to 5 July 2012, head office expenses such as group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.

4  Discontinued operations represent the operations of the United States Life business and related internal asset management activities.

 

 

 

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A4 - Segmental information continued

b (ii) Segmental income statement - products and services for the year ended 31 December 2011

	Restated5 Long-term Business £m	General insurance and health2 £m	Fund management £m	Other3 £m	Restated5 Total £m
Gross written premiums1	16,505	9,750	-	-	26,255
Premiums ceded to reinsurers	(960)	(588)	-	-	(1,548)
Net written premiums	15,545	9,162	-	-	24,707
Net change in provision for unearned premiums	-	(236)	-	-	(236)
Net earned premiums	15,545	8,926	-	-	24,471
Fee and commission income	705	54	373	333	1,465
	16,250	8,980	373	333	25,936
Net investment income/(expense)	3,811	725	4	(199)	4,341
Inter-segment revenue	-	-	156	-	156
Share of (loss)/profit of joint venture and associates	(10)	-	(2)	(111)	(123)
(Loss)/profit on the disposal and remeasurement of subsidiaries and associates	-	(28)	24	569	565
Segmental income	20,051	9,677	555	592	30,875
Claims and benefits paid, net of recoveries from reinsurers	(18,435)	(5,945)	-	-	(24,380)
Change in insurance liabilities, net of reinsurance	(2,281)	(3)	-	-	(2,284)
Change in investment contract provisions	1,478	-	-	-	1,478
Change in unallocated divisible surplus	2,721	-	-	-	2,721
Amortisation of acquired value of in-force business on insurance contracts	(70)	-	-	-	(70)
Impairment of goodwill and other intangibles, depreciation and other    amortisation expense	(277)	(19)	(16)	(64)	(376)
Other operating expenses	(2,293)	(2,994)	(443)	(833)	(6,563)
Impairment losses on AVIF and tangible assets	(17)	(60)	-	(19)	(96)
Inter-segment expenses	(145)	(11)	-	-	(156)
Finance costs	(205)	(36)	(51)	(484)	(776)
Segmental expenses	(19,524)	(9,068)	(510)	(1,400)	(30,502)
Profit/(loss) before tax from continuing operations	527	609	45	(808)	373
Tax attributable to policyholder returns	178	-	-	-	178
Profit/(loss) before tax attributable to shareholders from continuing operations	705	609	45	(808)	551
Adjusted for:
Non-operating items from continuing operations (excluding Delta Lloyd as an associate)	1,221	326	16	(49)	1,514
Share of Delta Lloyd's non-operating items (before tax), as an associate	-	-	-	(10)	(10)
Share of Delta Lloyd's tax expense, as an associate	-	-	-	34	34
Operating profit/(loss) before tax attributable to shareholders' profits    from continuing operations	1,926	935	61	(833)	2,089
Operating profit/(loss) before tax attributable to shareholders' profits    from discontinued operations4	382	1	49	(18)	414
Operating profit/(loss) before tax attributable to shareholders' profits	2,308	936	110	(851)	2,503

1  Gross written premiums includes inward reinsurance premiums assumed from other companies amounting to £226 million, of which £110 million relates to property and liability insurance and £116 million relates to long-term business.

2  General insurance and health business segment includes gross written premiums of £1,107 million relating to health business. The remaining business relates to property and liability insurance.

3  Other includes the RAC, up to the date of disposal, Delta Lloyd as an associate from 6 May 2011, head office expenses, such as group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.

4  Discontinued operations represent the operations of the United States Life business and related internal asset management activities and the results of Delta Lloyd up until its deconsolidation in May 2011.

5  Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.

 

 

Page 39

 

A4 - Segmental information continued

b (iii) Segmental statement of financial position - products and services as at 31 December 2012

 

	Long-term business £m	General insurance and health £m	Fund management £m	Other £m	Total £m
Goodwill	361	1,060	27	72	1,520
Acquired value of in-force business and intangible assets	799	146	56	83	1,084
Interests in, and loans to, joint ventures and associates	1,699	5	4	-	1,708
Property and equipment	253	94	5	39	391
Investment property	9,956	139	-	720	10,815
Loans	24,085	433	-	19	24,537
Financial investments	175,846	9,266	39	3,927	189,078
Deferred acquisition costs	1,615	939	14	-	2,568
Other assets	29,307	7,237	453	4,388	41,385
Assets of operations classified as held for sale	42,564	11	28	-	42,603
Total assets	286,485	19,330	626	9,248	315,689
Gross insurance liabilities	98,086	15,005	-	-	113,091
Gross liabilities for investment contracts	110,494	-	-	-	110,494
Unallocated divisible surplus	6,931	-	-	-	6,931
Net asset value attributable to unitholders	4,963	-	-	6,183	11,146
External borrowings	3,034	-	-	5,160	8,194
Other liabilities, including inter-segment liabilities	8,778	(2,661)	334	6,611	13,062
Liabilities of operations classified as held for sale	41,237	2	13	159	41,411
Total liabilities	273,523	12,346	347	18,113	304,329
Total equity					11,360
Total equity and liabilities					315,689

b (iv) Segmental statement of financial position - products and services as at 31 December 2011

 

 

	Restated2 Long-term Business £m	General insurance and health £m	Fund management £m	Other1 £m	Restated2 Total £m
Goodwill	1,466	1,067	29	78	2,640
Acquired value of in-force business and intangible assets	1,742	145	44	90	2,021
Interests in, and loans to, joint ventures and associates	2,035	5	-	778	2,818
Property and equipment	395	34	16	65	510
Investment property	10,686	152	-	800	11,638
Loans	27,511	605	-	-	28,116
Financial investments	203,247	9,391	43	3,377	216,058
Deferred acquisition costs	3,755	986	14	-	4,755
Other assets	31,023	6,717	495	5,159	43,394
Assets of operations classified as held for sale	426	-	-	-	426
Total assets	282,286	19,102	641	10,347	312,376
Gross insurance liabilities	132,138	15,241	-	-	147,379
Gross liabilities for investment contracts	113,366	-	-	-	113,366
Unallocated divisible surplus	650	-	-	-	650
Net asset value attributable to unitholders	4,659	-	-	5,693	10,352
External borrowings	3,016	-	-	5,434	8,450
Other liabilities, including inter-segment liabilities	12,430	(3,170)	374	6,819	16,453
Liabilities of operations classified as held for sale	363	-	-	-	363
Total liabilities	266,622	12,071	374	17,946	297,013
Total equity					15,363
Total equity and liabilities					312,376

1 "Other" includes Delta Lloyd as an associate.

2. Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified from participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.

 

 

 

Page 40

 

 

A5 - Tax

This note analyses the tax charge/(credit) for the year and explains the factors that affect it.

 (a) Tax charged/(credited) to the income statement

(i)   The total tax charge/(credit) comprises:

 

	2012 £m	2011 £m
Current tax
For this year	516	535
Prior year adjustments	(47)	(10)
Total current tax from continuing operations	469	525
Deferred tax
Origination and reversal of temporary differences	(52)	(599)
Changes in tax rates or tax laws	(12)	(28)
Write-down of deferred tax assets	43	58
Total deferred tax from continuing operations	(21)	(569)
Total tax charged/(credited) to income statement from continuing operations	448	(44)
Total tax charged/(credited) to income statement from discontinued operations	152	(107)
Total tax charged/(credited) to income statement	600	(151)

 

(ii)  The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge/(credit). The tax charge attributable to policyholders' returns included in the charge above is £221 million (FY11: £178 million credit).

(iii) The tax charge/(credit) can be analysed as follows:

 

	2012 £m	2011 £m
UK tax	(34)	(304)
Overseas tax	634	153
	600	(151)

 

(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £7 million and £11 million (FY11: £25 million and £108 million), respectively.

(v)  Deferred tax charged/(credited) to the income statement represents movements on the following items:

 

	2012 £m	2011 £m
Long-term business technical provisions and other insurance items	(1,868)	916
Deferred acquisition costs	254	(3)
Unrealised gains/(losses) on investments	2,312	(1,265)
Pensions and other post-retirement obligations	(7)	6
Unused losses and tax credits	(30)	22
Subsidiaries, associates and joint ventures	-	1
Intangibles and additional value of in-force long-term business	(12)	(10)
Provisions and other temporary differences	(670)	(236)
Deferred tax credited to income statement from continuing operations	(21)	(569)
Deferred tax charged to income statement from discontinued operations	143	56
Total deferred tax charged/(credited) to income statement	122	(513)

(b) Tax (credited)/charged to other comprehensive income

(i)   The total tax (credit)/charge comprises:

 

	2012 £m	2011 £m
Current tax from continuing operations
In respect of pensions and other post-retirement obligations	(14)	(88)
In respect of foreign exchange movements	(17)	(8)
	(31)	(96)
Deferred tax from continuing operations
In respect of pensions and other post-retirement obligations	(140)	260
In respect of fair value gains on owner-occupied properties	(1)	(1)
In respect of unrealised gains on investments	9	(3)
	(132)	256
Tax (credited)/charged to other comprehensive income arising from continuing operations	(163)	160
Tax charged to other comprehensive income arising from discontinued operations	107	98
Total tax (credited)/charged to other comprehensive income	(56)	258

 

 

Page 41

 

 

A5 - Tax continued

(ii)  The tax charge attributable to policyholders' returns included above is £nil (FY11: £nil).

(c) Tax credited to equity

Tax credited directly to equity in the year amounted to £18 million (FY11: £16 million), and is wholly in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes.

(d) Tax reconciliation

The tax on the Group's (loss)/profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows:

 

			2012			2011
	Shareholder £m	Policyholder £m	Total £m	Shareholder £m	Policyholder £m	Total £m
Total (loss)/profit before tax	(2,671)	221	(2,450)	87	(178)	(91)
Tax calculated at standard UK corporation tax rate of 24.5% (2011: 26.5%)	(654)	54	(600)	23	(47)	(24)
Reconciling items
Different basis of tax - policyholders	-	170	170	-	(129)	(129)
Adjustment to tax charge in respect of prior years	(20)	-	(20)	(25)	-	(25)
Non-assessable income	(86)	-	(86)	(60)	-	(60)
Non-taxable loss/(profit) on sale of subsidiaries and associates	872	-	872	(135)	-	(135)
Disallowable expenses	418	-	418	215	-	215
Different local basis of tax on overseas profits	(141)	(3)	(144)	84	(2)	82
Change in future local statutory tax rates	(12)	-	(12)	(32)	-	(32)
Movement in deferred tax not recognised	(69)	-	(69)	(5)	-	(5)
Tax effect of loss/(profit) from associates and joint ventures	75	-	75	(41)	-	(41)
Other	(4)	-	(4)	3	-	3
Total tax charged/(credited) to income statement	379	221	600	27	(178)	(151)

 

The tax charge/(credit) attributable to policyholders' returns is removed from the Group's total loss before tax in arriving at the Group's (loss)/profit before tax attributable to shareholders' profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group's pre-tax profit/(loss) attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge/(credit). The difference between the policyholder tax charge/(credit) and the impact of this item in the tax reconciliation can be explained as follows:

 

	2012 £m	2011 £m
Tax attributable to policyholder returns	221	(178)
UK corporation tax at a rate of 24.5% (2011: 26.5%) in respect of the policyholder tax deduction	(54)	47
Different local basis of tax of overseas profits	3	2
Different basis of tax - policyholders per tax reconciliation	170	(129)

 

The UK corporation tax rate reduced to 24% from 1 April 2012. A subsequent reduction in the UK corporation tax rate to 23% was substantively enacted on 3 July 2012 and will apply from 1 April 2013. The substantively enacted rate of 23% has been used in the calculation of the UK's deferred tax assets and liabilities.

      As announced in the 2012 Autumn Statement, the rate is expected to reduce further to 21% from 1 April 2014. The aggregate impact of the reduction in rate from 23% to 21% would reduce the deferred tax assets and liabilities and increase IFRS net assets
by approximately £31 million and will be recognised when the legislation is substantively enacted.

      Finance Act 2012 included initial legislation introducing considerable changes to the regime for taxing UK life insurance companies applicable from 1 January 2013. The impact of the legislation has been included in the results of the Group for the year ended
31 December 2012 but has not had a material impact.

 

 

Page 42

 

 

A6 - (Loss)/earnings per share

This note shows how we calculate earnings per share, based both on the present shares in issue (the basic (loss)/earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.

(a) Basic (loss)/earnings per share

(i)   The (loss)/profit attributable to ordinary shareholders is:

 

			2012			2011
Continuing operations	Operating profit £m	Non- operating items £m	Total £m	Operating profit £m	Non- operating items £m	Total £m
Profit/(loss) before tax attributable to shareholders' profits	1,888	(1,970)	(82)	2,089	(1,504)	585
Share of Delta Lloyd's tax expense as an associate	(28)	135	107	(39)	5	(34)
Profit/(loss) before tax	1,860	(1,835)	25	2,050	(1,499)	551
Tax attributable to shareholders' profit/(loss)	(465)	238	(227)	(487)	353	(134)
Profit/(loss) for the year	1,395	(1,597)	(202)	1,563	(1,146)	417
Amount attributable to non-controlling interests	(184)	16	(168)	(150)	109	(41)
Cumulative preference dividends for the year	(17)	-	(17)	(17)	-	(17)
Coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax)	(55)	-	(55)	(43)	-	(43)
Profit/(loss) attributable to ordinary shareholders from continuing operations	1,139	(1,581)	(442)	1,353	(1,037)	316
Profit/(loss) attributable to ordinary shareholders from discontinued operations	161	(3,009)	(2,848)	178	(329)	(151)
Profit/(loss) attributable to ordinary shareholders	1,300	(4,590)	(3,290)	1,531	(1,366)	165

 

(ii)  Basic (loss)/earnings per share is calculated as follows:

 

			2012			2011
Continuing operations	Before tax £m	Net of tax, non- controlling interests, preference dividends and DCI1 £m	Per share p	Before tax £m	Net of tax, non- controlling interests, preference dividends and DCI £m	Per share p
Operating profit attributable to ordinary shareholders	1,888	1,139	39.2	2,089	1,353	47.6
Non-operating items:
Investment return variances and economic assumption changes on long-term business	(620)	(499)	(17.2)	(897)	(599)	(21.1)
Short-term fluctuation in return on investments backing non-long-term business	7	9	0.3	(266)	(198)	(7.0)
Economic assumption changes on general insurance and health business	(21)	(16)	(0.6)	(90)	(67)	(2.3)
Impairment of goodwill, associates and joint ventures	(60)	(60)	(2.1)	(392)	(359)	(12.6)
Amortisation and net impairment of intangibles	(128)	(84)	(2.9)	(116)	(141)	(5.1)
(Loss)/profit on disposal of subsidiaries and associates	(164)	(164)	(5.6)	565	552	19.5
Integration and restructuring costs and exceptional items	(461)	(379)	(13.0)	(318)	(240)	(8.4)
Share of Delta Lloyd's non-operating items (before tax) as an associate	(523)	(388)	(13.3)	10	15	0.5
Share of Delta Lloyd's tax expense, as an associate	107	-	-	(34)	-	-
(Loss)/profit attributable to ordinary shareholders from continuing operations	25	(442)	(15.2)	551	316	11.1
(Loss)/profit attributable to ordinary shareholders from discontinued operations	(2,696)	(2,848)	(97.9)	(464)	(151)	(5.3)
(Loss)/profit attributable to ordinary shareholders	(2,671)	(3,290)	(113.1)	87	165	5.8

1. DCI includes direct capital instruments and fixed rate tier 1 notes

 

(iii) The calculation of basic (loss)/earnings per share uses a weighted average of 2,910 million (FY11: 2,845 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2012 was 2,946 million (FY11: 2,906 million) and 2,936 million (FY11: 2,892 million) excluding shares owned by the employee share trusts.

 

 

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A6 - (Loss)/earnings per share continued

(b) Diluted (loss)/earnings per share

(i)   Diluted (loss)/earnings per share is calculated as follows:

 

			2012			2011
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
(Loss)/profit attributable to ordinary shareholders	(442)	2,910	(15.2)	316	2,845	11.1
Dilutive effect of share awards and options	-	44	-	-	50	(0.2)
Diluted (loss)/earnings per share from continuing operations1	(442)	2,954	(15.2)	316	2,895	10.9
(Loss)/profit attributable to ordinary shareholders	(2,848)	2,910	(97.9)	(151)	2,845	(5.3)
Dilutive effect of share awards and options	-	44	-	-	50	-
Diluted (loss)/earnings per share from discontinued operations1	(2,848)	2,954	(97.9)	(151)	2,895	(5.3)
Diluted (loss)/earnings per share1	(3,290)	2,954	(113.1)	165	2,895	5.7

1  Losses have an anti-dilutive effect. Therefore the basic and diluted earnings for 2012 and the diluted earnings for 2011, have remained the same.

 

(ii)  Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows:

 

			2012			2011
	Total £m	Weighted average number of shares million	Per share p	Total £m	Weighted average number of shares million	Per share p
Operating profit attributable to ordinary shareholders	1,139	2,910	39.2	1,353	2,845	47.5
Dilutive effect of share awards and options	-	44	(0.6)	-	50	(0.8)
Diluted operating profit per share from continuing operations	1,139	2,954	38.6	1,353	2,895	46.7
Operating profit attributable to ordinary shareholders	161	2,910	5.5	178	2,845	6.3
Dilutive effect of share awards and options	-	44	(0.1)	-	50	(0.1)
Diluted operating profit per share from discontinued operations	161	2,954	5.4	178	2,895	6.2
Diluted operating profit per share	1,300	2,954	44.0	1,531	2,895	52.9

 

A7 - Dividends and appropriations

This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.

 

	2012 £m	2011 £m
Ordinary dividends declared and charged to equity in the year
Final 2011 - 16.00 pence per share, paid on 17 May 2012	465	-
Final 2010 - 16.00 pence per share, paid on 17 May 2011	-	451
Interim 2012 - 10.00 pence per share, paid on 16 November 2012	292	-
Interim 2011 - 10.00 pence per share, paid on 17 November 2011	-	287
	757	738
Preference dividends declared and charged to equity in the year	17	17
Coupon payments on direct capital instruments and fixed rate tier 1 notes	73	58
	847	813

 

Subsequent to 31 December 2012, the directors proposed a final dividend for 2012 of 9.0 pence per ordinary share (2011: 16.0 pence), amounting to £265 million (2011: £465 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on
17 May 2013 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2013.

      Interest payments on the direct capital instruments issued in November 2004 and the fixed rate tier 1 notes issued in May 2012 are treated as an appropriation of retained profits and, accordingly, are accounted for when paid. Tax relief is obtained at a rate of 24.5% (2011: 26.5%).

 

Page 44

 

 

A8 - Insurance liabilities

This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions the Group used.

(a) Carrying amount

Insurance liabilities at 31 December comprise:

 

			2012			2011
				Restated1		Restated1
	Long-term business £m	General insurance and health £m	Total £m	Long-term business £m	General insurance and health £m	Total £m
Long-term business provisions
Participating	49,473	-	49,473	52,872	-	52,872
Unit-linked non-participating	9,936	-	9,936	10,168	-	10,168
Other non-participating	71,781	-	71,781	68,131	-	68,131
	131,190	-	131,190	131,171	-	131,171
Outstanding claims provisions	1,342	7,711	9,053	1,311	8,099	9,410
Provision for claims incurred but not reported	-	2,843	2,843	-	2,646	2,646
	1,342	10,554	11,896	1,311	10,745	12,056
Provision for unearned premiums	-	4,441	4,441	-	4,483	4,483
Provision arising from liability adequacy tests	-	11	11	-	13	13
Other technical provisions	-	-	-	-	-	-
Total	132,532	15,006	147,538	132,482	15,241	147,723
Less: Amounts classified as held for sale	(34,446)	(1)	(34,447)	(344)	-	(344)
	98,086	15,005	113,091	132,138	15,241	147,379

1 Following a review of the classification of contracts issued by the Group's Italian long-term business, there has been a reallocation from participating insurance liabilities at 31 December 2011 to participating investment contract liabilities of £2,722 million.

(b) Long-term business liabilities

(i) Business description

The Group underwrites long-term business in a number of countries as follows:

n In the UK mainly in:

-  New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).

-  Old With-Profits sub-fund (OWPSF), With-Profits sub-fund (WPSF) and Provident Mutual sub-fund (PMSF) of UKLAP, where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance.

-  'Non-profit' funds of Aviva Annuity UK and UKLAP, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.

-  The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the 'lock-in' criteria set by the Reattribution Scheme have been met. RIEESA will be used to write non-profit business and also to provide capital support to NWPSF.

n In France, where the majority of policyholders' benefits are determined by investment performance, subject to certain guarantees, and shareholders' profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.

n In the US, there are two main types of business - protection products and accumulation products. Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies. The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and funding agreements for business customers.
In addition, there are two closed blocks of participating contracts arising from demutualisations of subsidiary companies.
All products are classified as insurance contracts except for the funding agreements and term certain immediate annuities, which are classified as non-participating investment contracts.

n In other operations in Europe and Asia, a range of long-term insurance and savings products are written.

 

 

 

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A8 - Insurance liabilities continued

(ii) Group practice

The long-term business provision is calculated separately for each of the Group's life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.

      Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets.

      In 2010, a test case was taken to the European Court of Justice to rule on the current law and practice whereby insurers may take into account a person's gender in the assessment of risk and consequently the pricing of insurance products. The ruling was issued on 1 March 2011 and required gender equality for pricing from 21 December 2012. The impact of the ruling on existing long-term business provisions in our UK and European businesses is not considered to be material.

      Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included
in the movements in the long-term business provision.

      For UK with-profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our
UK with-profit funds, no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus.

(iii) Methodology and assumptions

There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts - the net premium method and the gross premium method - both of which involve the discounting of projected premiums and claims.

      Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based
on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by
the policyholder, and so no assumption is required for persistency.

      The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience.

(a) UK

With-profit business

The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders' share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.

      For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular
and final bonuses.

      The items included in the cost of future policy-related liabilities include:

n Maturity Guarantees;

n Guaranteed Annuity Options;

n Guaranteed Minimum Pension underpin on Section 32 transfers; and

n Expected payments under Mortgage Endowment Promise.

 

In the Provident Mutual and With-Profits sub-funds in UKLAP, this is offset by the expected cost of charges to WPBR to be made in respect of guarantees.

      The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends.

      The principal assumptions underlying the cost of future policy-related liabilities are as follows:

 

 

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A8 - Insurance liabilities continued

Future investment return

A 'risk-free' rate equal to the spot yield on UK swaps was used. This replaced the use of a spot yield on UK government securities plus a margin of 0.1%, which was used at 31 December 2011. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2012 of 1.92% (FY11: 2.20%) for a policy with ten years outstanding.

Volatility of investment return

Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available, or on a best estimate basis where not.

 

Volatility	2012	2011
Equity returns	26.3%	26.4%
Property returns	15.0%	15.0%
Fixed interest yields	17.1%	18.0%

 

The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term. Fixed interest yield volatility is also dependent on term and money-ness. The figure shown is for a ten-year swap option with ten-year team, currently at the money.

Future regular bonuses

Annual bonus assumptions for 2012 have been set consistently with the year-end 2011 declaration. Future annual bonus rates reflect the principles and practices of the fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.

Mortality

Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends.
The mortality tables used in the valuation are summarised below:

 

Mortality table used	2012	2011
Assurances, pure endowments and deferred annuities before vesting	Nil or Axx00 adjusted	Nil or Axx00 adjusted
Pensions business after vesting and pensions annuities in payment	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement

Non-profit business

The valuation of non-profit business is based on regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience.

      For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.

      Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for
all asset classes.

 

 

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A8 - Insurance liabilities continued

The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.

      Valuation discount rates for business in the non-profit funds are as follows:

 

Valuation discount rates	2012	2011
Assurances
Life conventional non-profit	1.8%	1.8% to 1.9%
Pensions conventional non-profit	2.2%	2.6%
Annuities
Conventional immediate and deferred annuities	2.6% to 4.1%	2.2% to 4.3%
Non-unit reserves on Unit Linked business
Life	2.1%	1.8% to 2.2%
Pensions	2.5%	2.2% to 2.7%
Income Protection
Active lives	2.2%	2.4%
Claims in payment - level	3.1%	3.6%
Claims in payment - index linked	(0.7)%	(1.0)%

 

The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for default and downgrades, which vary by the credit ratings for bonds and mortgages, and short-term supplementary allowances for higher expected defaults during the current economic conditions. The credit risk allowance made for corporate bonds and commercial mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited equated to 56 bps and 89 bps respectively at 31 December 2012 (FY11: 60 bps and 69 bps respectively).
For corporate bonds, the allowance represented 30% of the average credit spread for the portfolio (FY11: 26%). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was
£1.8 billion (FY11: £1.6 billion) over the remaining term of the UK Life corporate bond and commercial mortgage portfolio. Total liabilities for annuity business were £30 billion at 31 December 2012 (FY11: £27 billion).

      Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends.
The mortality tables used in the valuation are summarised below:

 

Mortality tables used	2012	2011
Assurances
Non-profit	AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors	AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors
Pure endowments and deferred annuities before vesting	AM00/AF00 adjusted	AM00/AF00 adjusted
Annuities in payment
Pensions business	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement	PCMA00/PCFA00 adjusted plus allowance for future mortality improvement
General annuity business	IML00/IFL00 adjusted plus allowance for future mortality improvement	IML00/IFL00 adjusted plus allowance for future mortality improvement

 

For pensions annuity business in 2012, the underlying mortality assumptions for Males are 100.5% of PCMA00 with base year 2000, improvements based on CMI_2011 with a long-term improvement rate of 1.5% and an addition of 0.5% to all future annual improvements; for Females the underlying mortality assumptions are 95.5% of PCFA00 with base year 2000, improvements based
on CMI_2011 with a long-term improvement rate of 1.0% and an addition of 0.5% to all future annual improvements. Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced Annuity market.

(b) France

The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue
of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.

 

	Valuation discount rates	Mortality tables used
	2012 and 2011	2012 and 2011
Life assurances	0% to 4.5%	TD73-77, TD88-90,  TH00-02,TF00-02
Annuities	0% to 4.5%	TGF05/TGH05

 

 

Page 48

 

 

A8 - Insurance liabilities continued

(c) United States

For the major part of our US business, insurance liabilities are measured in accordance with US GAAP as at the date of acquisition.

      The liability for future policy benefits for traditional life insurance is computed using the net level method, based on guaranteed interest and mortality rates as used in calculating cash surrender values. Reserve interest assumptions ranged from 2.00% to 7.50%
in 2012 (FY11: 2.00% to 7.50%). The weighted average interest rate for all traditional life policy reserves in 2012 was 4.50%
(FY11: 4.50%).

      Future policy benefit reserves for universal life insurance, deferred annuity products and funding agreements are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. For the indexed products, the liability held is calculated based on the option budget method and is equal to the host contract and the calculated value of the derivative. The value of the derivative is based on the present value of the difference between the projected fund value and the underlying fund guarantee. The range of interest crediting rates for deferred annuity products, the largest component of the US business, excluding sales inducement payouts, was 1.00% to 5.20% in 2012 (FY11: 1.00% to 5.20%). An additional liability is established for universal life contracts with death or other insurance benefit features, which is determined using an equally weighted range of scenarios with respect to investment returns, policyholder lapses, benefit election rates, premium payout patterns and mortality. The additional liability represents the present value of future expected benefits based on current product assumptions.

      The indexed life and annuity products guarantee the return of principal to the customer, and credit interest based on certain indices. A portion of the premium from each customer is invested in fixed income securities and is intended to cover the minimum guaranteed value. A further portion of the premium is used to purchase derivatives to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. Both the derivatives and the options embedded in the policy are valued at their fair value.

     Deferred income reserves are established for fees charged for insurance benefit features which are assessed in a manner that is expected to result in higher profits in earlier years, followed by lower profits or losses in subsequent years. The excess charges are deferred and amortised using the same assumptions and factors used to amortise deferred acquisition costs. Deferred income reserves of £85 million in respect of insurance contracts in the United States are included under Other liabilities. Shadow adjustments may be made to deferred acquisition costs, acquired value of in-force business, deferred income reserves and contract liabilities. The shadow adjustments are recognised directly in other comprehensive income so that unrealised gains or losses on investments that are recognised directly in other comprehensive income affect the measurement of the liability, or related assets, in the same way as realised gains or losses.

(d) Other countries

In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.

(iv) Movements

The following movements have occurred in the long-term business provisions during the year:

 

	2012 £m	Restated1 2011 £m
Carrying amount at 1 January	131,171	157,988
Provisions in respect of new business	8,631	10,894
Expected change in existing business provisions	(8,362)	(8,541)
Variance between actual and expected experience	943	(2,279)
Impact of other operating assumption changes	(718)	(61)
Impact of economic assumption changes	1,726	5,663
Other movements	(109)	(623)
Change in liability recognised as an expense	2,111	5,053
Effect of portfolio transfers, acquisitions and disposals	(214)	(6)
Deconsolidation of Delta Lloyd	-	(32,159)
Foreign exchange rate movements	(1,878)	295
Carrying amount at 31 December	131,190	131,171

1  Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified for participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification.

 

The variance between actual and expected experience of £0.9 billion in 2012 was primarily due to the impact of favourable investment returns on liabilities for unit-linked insurance contracts. For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors.

      The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of insurance liabilities. The £1.7 billion impact of economic assumption changes reflects reductions in valuation interest rates, primarily in respect of immediate annuity and participating insurance contracts in the UK. The £0.7 billion impact of operating assumption changes mainly relates to mortality assumption in the UK, with the net impact reduced by movements in corresponding reinsurance assets. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note A11, together with the impact of movements in related non-financial assets.

 

 

 

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A8 - Insurance liabilities continued

(c) General insurance and health liabilities

(i) Provisions for outstanding claims

Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.

     Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.

      The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.

      The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross
of reinsurance, by major line of business.

 

	As at 31 December 2012			As at 31 December 2011
	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m	Outstanding claim provisions £m	IBNR provisions £m	Total claim provisions £m
Motor	3,737	1,051	4,788	3,960	995	4,955
Property	1,408	212	1,620	1,392	155	1,547
Liability	2,003	1,394	3,397	2,206	1,321	3,527
Creditor	54	13	67	59	19	78
Other	509	173	682	482	156	638
	7,711	2,843	10,554	8,099	2,646	10,745

(ii) Discounting

Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held:

 

	Rate		Mean term of liabilities
Class	2012	2011	2012	2011
Reinsured London Market business	2.0%	2.20%	11 years	13 years
Latent claims	0.33% to 3.35%	0.75% to 3.25%	6 to 15 years	7 to 16 years
Structured settlements	2.60%	2.70%	33 years	31 years

 

The gross outstanding claims provision before discounting was £11,004 million (FY11: £11,420 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.

      The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected below operating profit as an economic assumption change.

      During 2012, the Group has seen a levelling off in the number of new bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis.

(iii) Assumptions

Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claim technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for authorisation.

      No adjustments are made to the claims technicians' case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company's past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.

      Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.

 

 

 

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A8 - Insurance liabilities continued

The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order
to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of
a reserve range.

      As noted in section  A8 (b)(ii) - Group Practice, an area of judgement is the impact of a European Court of Justice ruling in March 2011 on gender equality for the pricing of insurance products. At 31 December 2012, the impact of the ruling on existing general business provisions was not considered to be material.

      The following explicit assumptions are made which could materially impact the level of booked net reserves:

UK mesothelioma claims

The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group's latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.

      The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £240 million greater than the best estimate, or £65 million lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.

Interest rates used to discount latent claim liabilities

The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown
in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2012, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £95 million, excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note A17.

Allowance for risk and uncertainty

The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.

      Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves.

      Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is currently under review.
The timing of the conclusion of this review is unclear and it is still uncertain whether or by how much the rate will change. However
an allowance has been included in provisions for a reduction in the Ogden discount rates. A reduction in the Ogden discount rates
will increase lump sum payments to UK bodily injury claimants.

 

 

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A8 - Insurance liabilities continued

(iv) Movements

The following changes have occurred in the general insurance and health claims provisions during the year:

 

	2012 £m	2011 £m
Carrying amount at 1 January	10,745	12,263
Impact of changes in assumptions	61	149
Claim losses and expenses incurred in the current year	6,291	6,520
Decrease in estimated claim losses and expenses incurred in prior years	(199)	(140)
Exceptional strengthening of general insurance latent claims provisions	-	45
Incurred claims losses and expenses	6,153	6,574
Less:
Payments made on claims incurred in the current year	(3,243)	(3,393)
Payments made on claims incurred in prior years	(3,104)	(3,514)
Recoveries on claim payments	297	313
Claims payments made in the year, net of recoveries	(6,050)	(6,594)
Unwind of discounting	35	47
Other movements in the claims provisions	2	(12)
Changes in claims reserve recognised as an expense	140	15
Effect of portfolio transfers, acquisitions and disposals	(171)	-
Deconsolidation of Delta Lloyd	-	(1,445)
Foreign exchange rate movements	(158)	(87)
Other movements	(2)	(1)
Carrying amount at 31 December	10,554	10,745

 

The effect of changes in the main assumptions is given in note A11.

 (d) Loss development tables

(i) Description of tables

The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2003 to 2012. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2003, by the end of 2012 £5,727 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £6,385 million was re-estimated to be £5,791 million at 31 December 2012.

      The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.

      The Group aims to maintain strong reserves in respect of its general insurance and health business in order to protect against adverse future claims experience and development. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. However, in order to maintain overall reserve adequacy, the Group establishes strong reserves in respect of the current accident year (2012) where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims.

      Key elements of the movement in prior accident year general insurance and health net provisions during 2012 were:

n £47 million release from UK & Ireland, including Group reinsurance business, due to favourable development in Group reinsurance, health and across a number of lines of business in Ireland.

n £51 million release from Europe mainly due to favourable development of personal motor and commercial property claims
in France.

n £122 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes
in Ontario.

 

Key elements of the release from prior accident year general insurance and health net provisions during 2011 were:

n £42 million strengthening from UK & Ireland, including Group reinsurance business, mainly due to unfavourable development on commercial motor, commercial liability and December 2010 freeze claims in the UK offset by favourable development of personal and commercial motor claims in Ireland.

n £6 million release from Europe mainly due to favourable development of personal and commercial motor claims in France offset by adverse development in Italy and Delta Lloyd.

n £92 million release from Canada mainly due to favourable experience on motor, following the legislative changes in Ontario, and commercial liability.

 

 

Page 52

 

A8 - Insurance liabilities continued

(ii) Gross figures

Before the effect of reinsurance, the loss development table is:

 

Accident year	All prior years £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	Total £m
Gross cumulative claim payments
At end of accident year		(2,819)	(2,971)	(3,345)	(3,653)	(4,393)	(4,915)	(3,780)	(3,502)	(3,420)	(3,055)
One year later		(4,190)	(4,561)	(5,011)	(5,525)	(6,676)	(7,350)	(5,464)	(5,466)	(4,765)
Two years later		(4,613)	(4,981)	(5,449)	(5,971)	(7,191)	(7,828)	(6,102)	(5,875)
Three years later		(4,972)	(5,263)	(5,784)	(6,272)	(7,513)	(8,304)	(6,393)
Four years later		(5,258)	(5,448)	(6,001)	(6,531)	(7,836)	(8,607)
Five years later		(5,409)	(5,617)	(6,156)	(6,736)	(8,050)
Six years later		(5,527)	(5,725)	(6,311)	(6,936)
Seven years later		(5,594)	(5,792)	(6,467)
Eight years later		(5,660)	(5,826)
Nine years later		(5,727)
Estimate of gross ultimate claims
At end of accident year		6,385	6,891	7,106	7,533	8,530	9,508	7,364	6,911	6,428	6,201
One year later		6,172	6,557	6,938	7,318	8,468	9,322	7,297	7,006	6,330
Two years later		6,124	6,371	6,813	7,243	8,430	9,277	7,281	6,950
Three years later		6,036	6,178	6,679	7,130	8,438	9,272	7,215
Four years later		5,932	6,008	6,603	7,149	8,409	9,235
Five years later		5,853	6,003	6,605	7,167	8,446
Six years later		5,813	5,953	6,591	7,167
Seven years later		5,792	5,933	6,596
Eight years later		5,798	5,926
Nine years later		5,791
Estimate of gross ultimate claims		5,791	5,926	6,596	7,167	8,446	9,235	7,215	6,950	6,330	6,201
Cumulative payments		(5,727)	(5,826)	(6,467)	(6,936)	(8,050)	(8,607)	(6,393)	(5,875)	(4,765)	(3,055)
	2,798	64	100	129	231	396	628	822	1,075	1,565	3,146	10,954
Effect of discounting	(479)	(4)	-	18	8	5	2	-	-	-	-	(450)
Present value	2,319	60	100	147	239	401	630	822	1,075	1,565	3,146	10,504
Cumulative effect of foreign exchange movements	-	14	18	24	39	37	(19)	(14)	(34)	(22)	-	43
Effect of acquisitions	-	1	1	1	4	-	-	-	-	-	-	7
Present value recognised in the statement of financial position	2,319	75	119	172	282	438	611	808	1,041	1,543	3,146	10,554

 

 

Page 53

 

 

A8 - Insurance liabilities continued

(iii) Net of reinsurance

After the effect of reinsurance, the loss development table is:

 

Accident year	All prior years £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m	2009 £m	2010 £m	2011 £m	2012 £m	Total £m
Net cumulative claim payments
At end of accident year		(2,819)	(2,870)	(3,281)	(3,612)	(4,317)	(4,808)	(3,650)	(3,386)	(3,300)	(2,925)
One year later		(4,158)	(4,378)	(4,925)	(5,442)	(6,542)	(7,165)	(5,286)	(5,242)	(4,578)
Two years later		(4,565)	(4,712)	(5,344)	(5,881)	(7,052)	(7,638)	(5,885)	(5,637)
Three years later		(4,924)	(4,986)	(5,671)	(6,181)	(7,356)	(8,094)	(6,177)
Four years later		(5,180)	(5,163)	(5,892)	(6,434)	(7,664)	(8,356)
Five years later		(5,325)	(5,327)	(6,039)	(6,625)	(7,852)
Six years later		(5,442)	(5,430)	(6,188)	(6,724)
Seven years later		(5,502)	(5,491)	(6,245)
Eight years later		(5,567)	(5,524)
Nine years later		(5,592)
Estimate of net ultimate claims
At end of accident year		6,218	6,602	6,982	7,430	8,363	9,262	7,115	6,650	6,202	5,941
One year later		6,093	6,266	6,818	7,197	8,302	9,104	7,067	6,751	6,103
Two years later		6,037	6,082	6,688	7,104	8,244	9,028	7,036	6,685
Three years later		5,942	5,882	6,544	6,996	8,249	9,007	6,978
Four years later		5,851	5,709	6,476	6,980	8,210	8,962
Five years later		5,772	5,699	6,448	6,992	8,221
Six years later		5,683	5,639	6,397	6,939
Seven years later		5,663	5,624	6,372
Eight years later		5,667	5,613
Nine years later		5,649
Estimate of net ultimate claims		5,649	5,613	6,372	6,939	8,221	8,962	6,978	6,685	6,103	5,941
Cumulative payments		(5,592)	(5,524)	(6,245)	(6,724)	(7,852)	(8,356)	(6,177)	(5,637)	(4,578)	(2,925)
	1,695	57	89	127	215	369	606	801	1,048	1,525	3,016	9,548
Effect of discounting	(330)	1	-	19	9	5	3	-	-	-	-	(293)
Present value	1,365	58	89	146	224	374	609	801	1,048	1,525	3,016	9,255
Cumulative effect of foreign   exchange movements	-	12	16	21	37	35	(19)	(12)	(32)	(20)	-	38
Effect of acquisitions	-	1	1	1	4	-	-	-	-	-	-	7
Present value recognised in the statement of financial position	1,365	71	106	168	265	409	590	789	1,016	1,505	3,016	9,300

 

In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as 'paid' at the date of disposal.

      The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2003. The undiscounted claim provisions for continuing operations, net of reinsurance, in respect of this business at
31 December 2012 were £1,003 million (FY11: £929 million). The movement in the year reflects strengthening of provisions by £8 million in the UK (FY11: exceptional strengthening of £35 million), other increases in undiscounted provisions of £51 million (FY11: £23 million), reclassification of commercial liability provisions of £55 million, claim payments, reinsurance recoveries and foreign exchange rate movements.

(e) Provision for unearned premiums

Movements

The following changes have occurred in the provision for unearned premiums (UPR) during the year:

 

	2012 £m	2011 £m
Carrying amount at 1 January	4,483	4,855
Premiums written during the year	9,535	10,364
Less: Premiums earned during the year	(9,514)	(10,099)
Change in UPR recognised as income	21	265
Gross portfolio transfers and acquisitions	(6)	(161)
Deconsolidation of Delta Lloyd	-	(424)
Foreign exchange rate movements	(57)	(52)
Carrying amount at 31 December	4,441	4,483

 

 

Page 54

 

 

A9 - Liability for investment contracts

This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.

(a) Carrying amount

The liability for investment contracts at 31 December comprised:

 

	2012 £m	Restated 2011 £m
Long-term business
Participating contracts	66,849	67,707
Non-participating contracts at fair value	46,299	43,990
Non-participating contracts at amortised cost	1,400	1,669
	47,699	45,659
Total	114,548	113,366
Less: Amounts classified as held for sale	(4,054)	-
	110,494	113,366

 

Following a review of the classification of contracts issued by the Group's Italian long-term business, there has been a reallocation from participating insurance liabilities at 31 December 2011 to participating investment contract liabilities of £2,722 million.

(b) Long-term business investment liabilities

Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.

      Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note A8. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence
of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project.

      For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus.     

      Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost.

      Of the non-participating investment contracts measured at fair value, £45,087 million in 2012 are unit linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves, if required, on a fair value basis. These contracts are generally classified as 'Level 1' in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied
by the number units in issue, and any non-unit reserve is insignificant.

      For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term.        

      In the US, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled by the holders unless there is a default under the agreement, but may, subject to a call premium, be terminated by Aviva at any time. Aviva issued no new funding agreements in 2012. The weighted average interest rates for fixed-rate and floating-rate funding agreements as at
31 December 2012 were 4.688% and 0.305% respectively. Funding agreements issued before 2008 are measured at fair value equal to the present value of contractual cash flows and, for business issued since 2008, are measured at amortised cost. Most funding agreements are fully collateralised and therefore their fair values are not adjusted for own credit risk. Funding agreements carried
at fair value total £0.6 billion and are classified as 'Level 2' in the fair value hierarchy.

      There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective
interest method.

      The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability.

(c) Movements in the year

The following movements have occurred in the year:

(i) Participating investment contracts

 

	2012 £m	Restated1 2011 £m
Carrying amount at 1 January	67,707	72,440
Provisions in respect of new business	2,695	3,688
Expected change in existing business provisions	(2,039)	(2,618)
Variance between actual and expected experience	102	(2,708)
Impact of operating assumption changes	9	(72)
Impact of economic assumption changes	74	631
Other movements	(82)	211
Change in liability recognised as an expense	759	(868)
Foreign exchange rate movements	(1,610)	(1,352)
Deconsolidation of Delta Lloyd	-	(2,523)
Other movements	(7)	10
Carrying amount at 31 December	66,849	67,707

1  Following a review of the classification of contracts issued by the Group's Italian long-term business, certain portfolios have been reclassified for participating insurance to participating investment contracts for all years presented. There is no impact on the result for any year presented as a result of this reclassification..

 

 

 

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A9 - Liability for investment contracts continued

For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors.

      The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note A11, together with the impact of movements in related non-financial assets.

(ii) Non-participating investment contracts

 

	2012 £m	2011 £m
Carrying amount at 1 January	45,659	48,305
Provisions in respect of new business	3,851	3,863
Expected change in existing business provisions	(2,531)	(2,558)
Variance between actual and expected experience	982	(2,796)
Impact of operating assumption changes	14	1
Impact of economic assumption changes	4	7
Other movements	104	(123)
Change in liability	2,424	(1,606)
Effect of portfolio transfers, acquisitions and disposals	25	-
Deconsolidation of Delta Lloyd	-	(832)
Foreign exchange rate movements	(404)	(206)
Other movements	(5)	(2)
Carrying amount at 31 December	47,699	45,659

 

The variance between actual and expected experience of £1.0 billion was primarily driven by favourable movements in investment markets in 2012. The rise in investment markets increased the value of unit linked contracts, which comprise the vast majority of the non-participating investment contract liabilities. For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors.

      The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impact of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note A11, which combines participating and non-participating investment contracts together with the impact of movements in related non -financial assets.

 

 

Page 56 

A10 - Reinsurance assets

This note details the reinsurance recoverables on our insurance and investment contract liabilities.

(a) Carrying amounts

The reinsurance assets at 31 December comprised:

 

	2012 £m	2011 £m
Long-term business
Insurance contracts	4,291	3,747
Participating investment contracts	3	-
Non-participating investment contracts 1	1,678	1,626
	5,972	5,373
Outstanding claims provisions	93	126
	6,065	5,499
General insurance and health
Outstanding claims provisions	900	974
Provisions for claims incurred but not reported	354	395
	1,254	1,369
Provisions for unearned premiums	248	245
	1,502	1,614
	7,567	7,113
Less: Amounts classified as held for sale	(883)	(1)
Total	6,684	7,112

1  Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk.

 

Of the above total, (less amounts classified as assets held for sale) £5,251 million (FY11: £5,086 million) is expected to be recovered more than one year after the statement of financial position date.

(b) Assumptions

The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.

(c) Movements

The following movements have occurred in the reinsurance asset during the year:

(i) In respect of long-term business provisions

 

	2012 £m	2011 £m
Carrying amount at 1 January	5,373	5,115
Asset in respect of new business	387	187
Expected change in existing business asset	166	7
Variance between actual and expected experience	197	290
Impact of operating assumption changes	(306)	(9)
Impact of economic assumption changes	143	433
Other movements	(137)	(260)
Change in asset	450	648
Effect of portfolio transfers, acquisitions and disposals	197	(2)
Deconsolidation of Delta Lloyd	-	(375)
Foreign exchange rate movements	(48)	(13)
Carrying amount at 31 December	5,972	5,373

 

The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets. The changes to the reinsurance asset from assumption changes mainly relates to business in the UK and Ireland, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note A11, together with the impact of movements in related liabilities and other non-financial assets.

 

 

 

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A10 - Reinsurance assets continued

(ii) In respect of general insurance and health outstanding claims provisions and IBNR

 

	2012 £m	2011 £m
Carrying amount at 1 January	1,369	1,558
Impact of changes in assumptions	22	87
Reinsurers' share of claim losses and expenses
Incurred in current year	286	247
Incurred in prior years	13	(84)
Exceptional strengthening of general insurance latent claims provisions	-	10
Reinsurers' share of incurred claim losses and expenses	299	173
Less:
Reinsurance recoveries received on claims
Incurred in current year	(138)	(138)
Incurred in prior years	(150)	(196)
Reinsurance recoveries received in the year	(288)	(334)
Unwind of discounting	13	19
Other movements	-	(1)
Change in reinsurance asset recognised as income	46	(56)
Effect of portfolio transfers, acquisitions and disposals	(136)	28
Deconsolidation of Delta Lloyd	-	(153)
Foreign exchange rate movements	(26)	(2)
Other movements	1	(6)
Carrying amount at 31 December	1,254	1,369

(iii) Reinsurers' share of the provision for UPR

 

	2012 £m	2011 £m
Carrying amount at 1 January	245	307
Premiums ceded to reinsurers in the year	641	650
Less: Reinsurers' share of premiums earned during the year	(636)	(678)
Change in reinsurance asset recognised as income	5	(28)
Reinsurers' share of portfolio transfers and acquisitions	3	-
Deconsolidation of Delta Lloyd	-	(30)
Foreign exchange rate movements	(5)	(4)
Other movements	-	-
Carrying amount at 31 December	248	245

A11 - Effect of changes in assumptions and estimates during the year

Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2011 to 2012, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.

 

	Effect on profit 2012 £m	Effect on profit 2011 £m
Assumptions
Long-term insurance business
Interest rates	(515)	(2,403)
Expenses	11	5
Persistency rates	-	(4)
Mortality for assurance contracts	-	35
Mortality for annuity contracts	241	(21)
Tax and other assumptions	(207)	99
Investment contracts
Interest rates	(2)	(82)
Expenses	(1)	-
Persistency rates	-	-
Tax and other assumptions	-	28
General insurance and health business
Change in loss ratio assumptions	-	5
Change in discount rate assumptions	(21)	(90)
Change in expense ratio and other assumptions	(21)	22
Total	(515)	(2,406)

 

The impact of interest rates for long-term business relates primarily to the UK and Ireland driven by the reduction in valuation interest rates. This had the effect of increasing liabilities and hence a negative impact on profit. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. The impact of tax and other assumptions relates mainly to strengthening of credit default assumptions for commercial mortgages backing UK annuity business.

 

 

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A12 - Unallocated divisible surplus

An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined.         

      The following movements have occurred in the year:

 

	2012 £m	2011 £m
Carrying amount at 1 January	650	3,428
Change in participating contract assets	6,140	(3,016)
Change in participating contract liabilities	253	244
Other movements	(77)	70
Change in liability recognised as an expense	6,316	(2,702)
Effect of portfolio transfers, acquisitions and disposal	1	-
Deconsolidation of Delta Lloyd	-	(144)
Foreign exchange rate movements	24	60
Other movements	(5)	8
Carrying amount at 31 December	6,986	650
Less: Amounts classified as held for sale	(55)	-
	6,931	650

     

In Italy, the UDS balance was £2 million negative at 31 December 2012 (FY11: £1,449 million negative). In Spain, certain participating funds had negative UDS balances at 31 December 2012, although in aggregate the UDS balance was £95 million positive (FY11: £13 million positive).

      Negative UDS balances result from an accounting mismatch between participating assets carried at market value and participating liabilities measured using local practice. The negative balances were tested for recoverability using embedded value methodology and in line with local accounting practice. Testing is conducted at a participating fund-level within each life entity. The negative balances are considered to be recoverable from margins in the existing participating business liabilities.

      In Italy, there was a loss of £9 million for negative UDS considered irrecoverable (FY11: £17 million loss), and in Spain a reversal of £33 million of previous losses (FY11: £49 million loss).

      In Italy the estimation of the recoverable negative UDS balance uses a real-world embedded value method, with a risk-discount rate of 6.25%. (FY11: 7.05%). The embedded value method includes implicit allowance for the time value of options and guarantees. If the risk discount rate were increased by 1% it is estimated that the recoverable negative UDS balance would be unchanged.

      In Spain, the estimation of the recoverable negative UDS balance uses a market-consistent embedded value method.

A13 - Borrowings

Our borrowings are either core structural borrowings or operational borrowings. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.

Movements during the year

Movements in borrowings during the year were:

 

			2012			2011
	Core Structural £m	Operational £m	Total £m	Core Structural £m	Operational £m	Total £m
New borrowings drawn down, including commercial paper, net of expenses	2,200	452	2,652	3,853	1,042	4,895
Repayment of borrowings, including commercial paper	(2,295)	(347)	(2,642)	(3,848)	(1,283)	(5,131)
Net cash (outflow)/inflow	(95)	105	10	5	(241)	(236)
Foreign exchange rate movements	(54)	(130)	(184)	9	193	202
Borrowings acquired for non-cash consideration	-	-	-	-	34	34
Fair value movements	-	43	43	-	8	8
Amortisation of discounts and other non-cash items	1	(13)	(12)	3	-	3
Deconsolidation of Delta Lloyd	-	-	-	(816)	(5,683)	(6,499)
Movements in debt held by Group companies 1	32	-	32	(12)	1	(11)
Movements in the year	(116)	5	(111)	(811)	(5,688)	(6,499)
Balance at 1 January	5,255	3,195	8,450	6,066	8,883	14,949
Balance at 31 December	5,139	3,200	8,339	5,255	3,195	8,450

1  Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.

 

All movements in fair value in 2011 and 2012 on securitsed mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.

 

 

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A14 - Pension obligations

(a) Carrying amounts

 

	2012 £m	2011 £m
Total IAS 19 obligations to main staff pension schemes	651	406
Deficits in other staff pension schemes	88	86
Total IAS 19 obligations to staff pension schemes	739	492
Restructuring provisions	144	106
Other provisions	423	398
Total	1,306	996
Less: Amounts classified as held for sale	(187)	(4)
	1,119	992

(b) Movements in the scheme deficits and surpluses

Movements in the pension schemes' surpluses and deficits comprise:

 

2012	Scheme assets £m	Scheme liabilities £m	Pension scheme net surplus/ (deficit) £m	Adjust for Group insurance policies £m	IAS 19 pensions net surplus/ (deficit) £m
Net surplus in the schemes at 1 January	11,791	(10,527)	1,264	-	1,264
Employer contributions	250	-	250	-	250
Employee contributions	2	(2)	-	-	-
Benefits paid	(357)	357	-	-	-
Current and past service cost	-	(19)	(19)	-	(19)
Gain on curtailments and settlements	-	15	15	-	15
Credit/(charge) to finance costs	427	(509)	(82)	-	(82)
Actuarial gains/(losses)	184	(1,014)	(830)	-	(830)
Exchange rate movements on foreign plans	(16)	24	8	-	8
Net surplus in the schemes at 31 December	12,281	(11,675)	606	-	606

 

2011	Scheme assets £m	Scheme liabilities £m	Pension scheme net surplus/ (deficit) £m	Adjust for Group insurance policies1 £m	IAS 19 pensions net surplus/ (deficit) £m
Net deficits in the schemes at 1 January	11,416	(11,419)	(3)	(1,445)	(1,448)
Employer contributions	452	-	452	(66)	386
Employee contributions	12	(12)	-	(9)	(9)
Benefits paid	(356)	356	-	15	15
Current and past service cost	-	(58)	(58)	-	(58)
Credit/(charge) to finance costs	465	(565)	(100)	(13)	(113)
Actuarial gains/(losses)	1,347	(356)	991	16	1,007
Disposals	(23)	30	7	-	7
Deconsolidation of Delta Lloyd	(1,589)	1,558	(31)	1,582	1,551
Exchange rate movements on foreign plans	67	(61)	6	(80)	(74)
Net surplus in the schemes at 31 December	11,791	(10,527)	1,264	-	1,264

1. Relates to non-transferrable insurance policies treated as other obligations to staff pension schemes in the Delta Lloyd subsidiary, which was deconsolidated in 2011.

 

The fall in the pension schemes' net surplus during 2012 is mainly attributable to losses arising from changes in actuarial assumptions, which primarily reflect the impact of lower discount rates for liabilities.

 (c) Pension expense

The total pension expense comprises:

Recognised in the income statement

 

	2012 £m	2011 £m
Continuing operations